25 May Creditors Try To Collect Debt Discharged By Bankruptcy

The goal of filing for bankruptcy is to discharge debts that the debtor can’t pay back. After bankruptcy is filed, creditors can’t try to collect the discharged debt.s Bankruptcy may be filed as either a Chapter 7 bankruptcy case or Chapter 13, but both discharge debts.

There are debts that simply aren’t discharged in bankruptcy, and others that might not be discharged if a suit is brought in bankruptcy court within a certain time period, but most unsecured (no collateral) debts are written off in bankruptcy.

If a debt doesn’t fit into one of those catagories, the bankrupt debtor has been released from the legal obligation to pay and the debtor no longer owes the debt.

Unfortunately, more and more creditors continue to report discharged debts on credit reports, continue to try to collect the discharged debts, and continue to sell the discharged debts to debt buyers who then try to collect the debt and/or report it on the credit report. Henry Sommer, President of the National Association of Consumer Bankruptcy Attorneys was quoted by the Houston Chronicle (article below) calling for a law preventing resale of debts discharged by bankruptcy

If you filed for bankruptcy and you see that your discharged debts are not being reported correctly, first dispute the debts according to the instructions from the credit bureau, and if it isn’t fixed, contact your bankruptcy attorney immediately.

If your attorney doesn’t work with clients to clean up thier credit report, contact another experienced attorney who does work with Fair Debt Reporting Issues and/or enforcement of the bankruptcy discharge laws.

Prince Ella Green thought so. She and her husband, James, who live in League City, fell on hard times and filed bankruptcy in 1995.

The case was a Chapter 13, meaning the Greens submitted a plan for repaying most of their debt, which they did during the next five years.

Some debt, including a mortgage on a home in Texas City that the Greens bought as an investment property and later lost to foreclosure, was discharged as part of the bankruptcy, according to court records.

In other words, a judge ruled that the mortgage was debt the Greens were not legally responsible for paying.

Persistent efforts

Tell that to Cenlar Federal Savings Bank and several other companies that have been trying to collect the debt ever since.

The Greens claim that about a year after the bankruptcy was discharged, Cenlar reported the Texas City mortgage as a current debt to all the major credit bureaus. Green provided a credit report showing Cenlar reported it in late 2001.

The Greens contacted the credit bureaus and got them to remove the debt from their reports, but like a bad penny, it keeps coming back.

"It was gone off my credit," Green said. "Then they sold it."

In 2002, the loan showed up on the Greens’ credit report again, reported by Aurora Loan Services, a unit of Lehman Bros., according to a copy of the report. Aurora claimed the debt was current and tried to collect it, Green said.

The Greens again contacted the credit bureaus, informed them the loan had been discharged in bankruptcy court and again got it removed from their reports.

Three years later …

It showed up on their credit report again three years later, this time reported by Midland Mortgage Co., a division of Midland Bank in Oklahoma City. The Greens have gotten it removed again, but Prince Ella Green said Midland has told her it still believes she must pay the money.

None of the mortgage companies would comment.

In recent years, a cottage market has developed for discharged bankruptcy debt like that of the Greens. Collection companies buy the debt for as little as 3 cents on the dollar, then try different tactics to collect.

"It ought to be illegal to sell bankruptcy debt," said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys.

Zombie debt

The U.S. Bankruptcy Code prohibits the collection of discharged debt — often referred to as zombie debt — but that doesn’t stop collectors from trying to get the debtors to pay voluntarily.

Charles Delbaum, an attorney with the National Consumer Law Center, said it’s illegal for collectors to threaten debtors with legal action over discharged debt, and it’s illegal to report it to a credit bureau if they know it’s been discharged.

"The general problem is the debt buyer either doesn’t care or makes no effort to find out if the debt was discharged," he said.

"They either seek to collect it or keep reporting it on a credit report hoping that will force the individual to pay the debt."

Credit bureaus, of course, have no responsibility for ensuring the accuracy of credit reports, which is why so many contain errors.

It’s also why there’s a market for discharged debt. Without using credit reports to coerce debtors into paying, collectors would have little recourse.

Perhaps the weakening economy is causing more companies to attempt to collect defaulted debt, or perhaps the collection industry is getting more efficient. Either way, Tomlinson said he sees collectors "trying to collect on people they used to give up on."

Taking it to court

The Greens’ case, though, predates the recent rise of such cases, and the length of time during which creditors have pursued them is unusual.

Tired of battling the zombie debt for more than a decade, the Greens went on the offensive. In February, they sued all three mortgage companies that had attempted to collect the debt, accusing them of, among other things, deceptive trade practices and violating federal bankruptcy and debt collection laws.

In court documents, the companies denied the Greens’ claim and questioned whether the Texas City property was discharged in the bankruptcy.

The case is set for trial in Galveston next year.

"I decided I’m not going to take this lying down," Green said. "It’s not just me. It’s happening all over America."

As more Americans struggle with mounting debt, they’re finding that, like bad pennies, sometimes the debt never goes away.

Concentrating in Consumer Bankruptcy Law since 1988;
Wake Forest Law School JD 1987
Law Office of Susanne M. Robicsek since 1993,
Law Clerk to Judge Rufus Reynolds, US Bankruptcy Judge for Middle District of NC; Burns Price & Arneke, PA, David Badger and Associates, PA.